TOKYO -- Emerging countries are set to issue as much as $3 trillion in new government bonds this year, nearly double the 2019 total, with central bank support that risks increasing these economies' reliance on institutions that are at least nominally independent.
Government spending in these countries is surging amid a scramble to shore up coronavirus-battered economies. The International Monetary Fund projects that the overall fiscal deficit of 40 emerging-market countries, including China, will swell to 10.6% of gross domestic product this year from 4.9% in 2019.
Based on this estimate and private-sector forecasts, deficits in these countries will more than double to $3 trillion for the year, the bulk of which is expected to be covered with new debt. This is on top of another $1.5 trillion in previously issued bonds being rolled over this year.
Emerging markets, lacking the solid domestic capital bases of their developed counterparts, frequently rely on foreign investors to buy these bonds. But March saw foreign money flood out of debt markets in these countries as the coronavirus crisis worsened, sending their currencies plunging.
In many cases, central banks faced with a dearth of overseas bond buyers have stepped in to fill the gap.
A survey last month by the Bank for International Settlements found that central banks in 13 countries, including Indonesia, South Africa, Turkey and Poland, announced bond purchase programs in March and April. The total has since risen to nearly 20.
Eight major emerging economies whose monetary authorities purchase government debt, including South Africa and India, have borrowed a total of $550 billion so far this year, according to an analysis by J.P. Morgan. That is equivalent to about a fifth of all new emerging-market debt issuance. These countries are covering about 90% of their fiscal shortfalls with local-currency bonds, with central banks buying roughly half.
Such programs put central bank independence at risk. If debt monetization becomes established practice, governments may treat it as a license to print money and spend wildly. That could scare away foreign investors worried about inflation, leading to a currency crash.
Bank Indonesia has moved to buy sovereign debt not only on the open market, but also directly from the government -- a step normally considered taboo -- after regulations were changed in March to allow it as a last resort. The central bank will return interest earned on the bonds to the government, providing further fiscal support.
South African Deputy Finance Minister David Masondo in May called for the South African Reserve Bank, which had already announced plans to buy government debt on the secondary market, to consider direct purchases as well.
"I would support the SARB, if they decide to directly buy government bonds," he told the Sunday Times.
Analysts including Jahangir Aziz of J.P. Morgan argue that governments must pledge to return to normal fiscal and monetary policy once economic activity recovers. Without trust in a country's fiscal discipline and the independence of its central bank, measures intended to provide stability in a crisis could end up creating more turmoil.
